If you have built a substantial estate during your lifetime, it is natural to want to share that wealth with your children or other loved ones. Many people rely on a Last Will and Testament to distribute their assets. While that is certainly one option, it may not always be the best one, particularly if you have concerns about a beneficiary’s ability to handle a large inheritance. Rather than risk handing over a significant lump sum that may be wasted or mismanaged, there are planning strategies you can use to better protect both your legacy and your beneficiaries. With that in mind, the Los Angeles attorneys at Schomer Estate & Wealth Advisors explain how to avoid leaving a lump sum inheritance.
Why a Lump Sum Inheritance May Be Problematic
Distributing assets outright through a Will can create a number of problems depending on the circumstances of the recipient. Not all beneficiaries are equally equipped to handle a large influx of money.
In some cases, the issue may be age. A minor child cannot legally inherit assets directly. If a child is named as a beneficiary in a Will, a court-appointed guardian or conservator must manage those assets until the child reaches adulthood. Even then, turning over a substantial inheritance to an 18-year-old, even a responsible one, can lead to poor financial decisions.
Addiction issues are another major concern. If a loved one struggles with substance abuse, compulsive gambling, or similar behavior, an outright inheritance could actually do more harm than good. Sudden access to large sums of money may only fuel destructive habits.
A similar risk exists with spendthrift beneficiaries. Some individuals are simply not good at managing money. Whether due to lack of experience, impulsivity, or financial immaturity, a spendthrift heir might quickly burn through their inheritance, leaving little or nothing for future needs.
In all these situations, a lump sum distribution could ultimately fail to accomplish your intended goals. While your Will allows you to direct who receives what portion of your estate, it does not allow you to attach conditions, timelines, or safeguards to those gifts. Once the assets are distributed through probate, the recipient has complete control over them.
Using a Trust as a Better Alternative
To maintain control over how your assets are passed on and protect against the risks associated with lump sum distributions, consider using a trust as part of your estate plan. Trusts offer greater flexibility, privacy, and long-term protection than a Will alone.
A trust is a legal arrangement in which one person, the Grantor (also called the Settlor or Trustor), places assets in the hands of another person or institution, known as the Trustee. The Trustee manages and distributes the trust assets for the benefit of the named beneficiaries according to the instructions you include in the trust document.
There are many types of trusts, allowing you to tailor one to meet your specific needs. A common option for estate planning purposes is a revocable living trust. You can create the trust during your lifetime, retain control over it while you are alive and well, and then name a successor Trustee to take over when you become incapacitated or pass away.
One of the primary advantages of a trust is the ability to structure how and when assets are distributed. You do not have to leave everything to a beneficiary in one large sum. Instead, you can instruct the Trustee to distribute assets in smaller amounts over time.
For example, you might provide for monthly or quarterly distributions to a beneficiary who is not financially stable. If you are planning for a child or grandchild, you might set up disbursements at milestones such as graduation, marriage, or reaching a certain age. Some parents choose to release portions of a trust at ages 25, 30, and 35, helping their children gain maturity and financial literacy before receiving the full inheritance.
For beneficiaries with substance abuse or financial management issues, you may want to include conditions requiring them to meet certain goals before they can receive distributions. You might even authorize the Trustee to work with a financial advisor or counselor to help your loved one develop responsible habits over time.
The key to avoiding a lump sum inheritance and protecting your beneficiaries is to take control of your estate planning early and work with an experienced estate planning attorney who can help you weigh your options.
Can We Help You Avoid Leaving a Lump Sum Inheritance?
For more information, please join us for an upcoming FREE seminar. If you would like assistance to avoid leaving a lump sum inheritance, contact the experienced Los Angeles estate planning attorneys at Schomer Estate & Wealth Advisors by calling (310) 337-7696 to schedule an appointment.
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